Paying taxes, either directly or indirectly, is one of the realities you can’t escape. At some given moments, you will have to give Caesar what belongs to them. As a self-employed individual, it is essential to pay your taxes and avoid audits and hefty penalties it comes with it.
This situation means you have to plan early in advance since, unlike the employed individuals who have their taxes deducted from payslips, you have to pay your taxes directly. It would be smart to set money to pay for your tax requirements. This article will discuss some of the things you need to know about self-employment taxes. Read on.
Self Employed Tax obligations
When selling goods or services, self-employed individuals must include taxes to avoid getting into losses. Like the way you do savings and reinvestments, you must plan for your taxes by keeping on-track sales, expenses, and other deductions to help you pay your taxes.
This situation means you must have a self-employment tax calculator to guide you in calculating your taxes periodically. Who are the self-employed individuals? According to IRS, self-employed individuals include independent contractors or sole-proprietors or a member of a partnership carrying business or trade. Millions of Americans are self-employed and pay this self-employment tax.
Definition of Self-Employment Tax
If employed, your Medicare and Social Security taxes are shared between you and the employer. At least 8% of your income is paid towards this, with your employer contributing the same amount. If self-employed, it means you don’t have an employer and have to settle the whole amount.
However, such applies to only some limit of your salary, which varies per year and the region you are in. Wages above that limit are exempted from self-employment tax.
How Do You Fill in Self-Employment Taxes?
Before filing for self-employment taxes, you have to know your tax rates and if your region has other additional taxes. Knowing your rate means calculating your net profit or loss before taxes. Net profit is obtained by subtracting the business expenses from the income, and any negatives portray you ran at a loss.
If earnings exceeded by $400, you need to fill Form 1040. Such also applies when you don’t exceed the amount but have met other requirements listed on the form. If you expect to have over $1000 debt in tax, you need to make tax payments each quarter of the year.
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How To Calculate Self-Employment Tax
Self-employment tax varies in percentage from one year to another. As of 2019, the tax was 15.3%, including a Medicare of 2.9% and the Social Security Tax of 12.4%. Out of the total earnings, only $132,900 gets subjected to Social Security tax, while Medicare varies if earnings surpass $200,000 for single filing and $250,000 for joint filing.
When calculating the tax, start with the earnings, and then deduct the expenses before applying the rates. Over 90% of your net earnings are subjected to taxation, meaning you need to be careful when making the calculations to avoid losses. After getting the net earnings, you can then apply the 15.3% to deduct the required taxes. In case you suffered a loss in your self-employment business, the IRS has some other ways of calculating these taxes. Ensure these calculations are done at the end of the financial period and that all deductions approved by the IRS are made.
How to File Taxes
There are two methods to file the self-employment taxes: the quarterly and the annual filing. With quarterly filing and payments, you are required to make the estimated tax payments using Form 1040-ES, which takes into consideration the previous year’s tax payments.
If it’s your first year to pay the taxes, you can project how much you intend to receive at the end of the year. For the annual payments, you need to calculate your net earnings before filing for the taxes.
It would help if you estimated your profit or loss before filing Form 1040. You have to make all the filings as required both in Medicare and Social Security Taxes before submitting the forms and make payments for the same. Compared with the quarterly taxes, these payments are made after calculating the net earnings, while the quarterly filing is done before estimates.
How to Save on Self-Employment Taxes
If you are carrying out the self-employment business full time, there are several write-offs you can make to saving on taxes. Some of these include the startup costs, business vehicle expenses, home-office deduction, supplies and equipment, social security and Medicare taxes, and health insurance premiums. Especially the self-employed health insurance can be a huge cost saver.
All these are done to enable your business to run and create more income. A good example is promotion expenses, which are deducted despite allowing you to get more profits for your business. To know what to deduct and the amount, it’s better to use tax calculator software to make the process easier and fast.
Tax Deductions and Credits
To enjoy tax deductions and credits, you have to know its differences too. Tax credits usually decrease the total amount of taxes you owe to the tax department, while deductions lower the taxable income. Through deductions, you can reduce your tax bracket without lowering the actual taxes.
The deduction varies on different occasions, including whether to file as single or married and if you are the household head. Other than these, there are itemized deductions, which vary from one taxpayer to another. Some of the itemized deductions are medical and dental expenses, state sales and local tax, state taxes, property taxes, charitable contributions, Student loan interest, property taxes, and mortgage interest. You can take the standard or itemized deductions, depending on which one becomes higher.
Tax credits also come in two types: Non-refundable tax credits, which allow you to reduce your actual tax payments, and Refundable tax credits, where you pay everything and get refunded the credited amount. Some tax credits include Earned income, the federal tax on fuels, Additional child, American opportunity credit, Premium tax, and Health coverage tax credits.
Paying taxes is mandatory since it enables both the state and local governments to run and sponsor their duties and projects efficiently. It would be best to get prepared to pay your taxes on time to avoid inconveniences and fines. Use the available tax calculators and enjoy the easy process of filing these taxes.
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